[SOLVED] AASB 10.6 define control as follows:

Arthur et al. Q1.11 Definition and indicators of control (Section 1.7.2)
Appendix A and AASB 10.6 define control as follows:
An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
AASB 10.7 indicates that there are three essential components to this definition of control, namely: (1) the investor has power over the investee; (2) the investor has exposure or rights to variable returns from its involvement in the investee; and (3) the investor must be able to use the power it has over the investee to affect the amount of the investors returns. It is most important to understand that in any given investor- investee relationship, all three of these components must be satisfied before control can be confirmed and a parentsubsidiary relationship established. As the AASB 10 definition of control is focused on the economic substance of the investorinvestee relationship, simple bright line tests such as having more than 50% of the voting shares of the investee are not sufficient to determine the existence of control.

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Power over the investee
AASB 10.10 indicates that an investor has power over the investee when the investor has existing rights that give it the current ability to direct the relevant activities of the investee. Relevant activities are defined in AASB 10.Appendix A as activities of the investee that significantly affect the investees returns. Relevant activities are those activities that generate value from the investee. An investor must be able to direct the relevant activities of the investee to satisfy the power criterion of the control definition. AASB 10.B5B13 of Appendix B provide guidance on how to identify an investees relevant activities. AASB 10.B5 notes that to identify the relevant activities, it will be necessary to consider the purpose and design of the investee. Although the identification of relevant activities will always depend on the particular facts of the situation, AASB 10.B11 provides some common examples of relevant activities including the buying and selling of goods or services, managing the investees financial and non-financial assets or developing new intellectual property.
The investor must have rights that give it the current ability to direct the investees relevant activities. Note that the investor does not have to be exercising those rights to have power over the investee. The investor can be passive but still have power. For example, A Ltd may own 80% of C Ltd and B Ltd may own the remaining 20% of C Ltd. As at 30th June, 2016 B Ltd may be actively involved on a day-to-day basis in the management of C Ltds operations. However, in the absence of any other information, B Ltd does not control C Ltd for the purposes of AASB 10. Although A Ltd has not exercised the power that comes from its 80% holding of C Ltds voting shares, it has the current capacity to do so if it wished. It could out vote B Ltd and veto any of B Ltds decisions with regard to the relevant activities of C Ltd. Consequently, based on these limited facts, A Ltd would control C Ltd. In this example, A Ltds rights are determined by its superior voting power that come from it holding the issued share capital of C Ltd. AASB 10.B22 identifies these types of rights as being substantive rights; that is, a substantive right is one that the investor has the practical ability to exercise.

Substantive rights are not limited to those that arise from holding equity in the investee. Substantive rights could arise from a legal contract or from legislation or other regulations for example. As the name implies, substantive rights are identified on the basis of the substance of the investorinvestee relationship rather than its apparent form. For example, it was noted in section 1.5.3 that traditional tests of parent/subsidiary relationships were based on the percentage of voting equity held by the investor in the investee. Typically, an investor entity having a share ownership of more than 50% in the investee was viewed as giving rise to control over the investee. However, under the notion of power in AASB 10, an investor could have power over an investee if it held less than 50% of the voting power of the investee, and even, in some cases if it had no equity ownership at all. These types of situation in which the investor has power only without a majority of voting rights is often called de facto power. Clearly, in such situations, the sound exercise of professional judgement is paramount and the facts in each case need to be carefully assessed. AASB 10.B41B45 provide specific guidance on other factors and circumstances that should be considered when assessing the existence of de facto control. In general, evidence should be gathered as to whether there are sufficient rights held by other parties that could act as a counter-veiling power to that held by the investor. A discussion of de facto power also highlights that the investors control over an investee could be temporary but the existence of so-called temporary control does not exempt the investor from consolidating the investee for the period of time that control existed.
Some types of rights that are held by an entity are protective rights rather than substantive rights. Appendix A of AASB 10 defines protective rights as:
Rights designed to protect the interest of the party holding those rights without giving that party power over the entity to which those rights relate.
Examples of protective rights are given in AASB 10.B28 and include the right of a lender to seize any assets from a borrower if the borrower breaches specific provisions of its loan contract. Protective rights can be common in the not-for-profit sector where governments, for example, may place a variety of restrictions on the activities of some charities or other entities. As noted by the definition, protective rights are not a basis for establishing power over an investee for the purposes of AASB 10.
Exposure or rights to variable returns
The second component of the control definition requires that the investor entitys own returns be potentially affected by its involvement in the investee. The returns must potentially be variable rather than fixed or in other words the returns from the investee depend upon the investees performance (AASB 10.B56). AASB 10s definition of control adopted the term returns rather than the term benefits which had been used in the prior version of AASB 127 because it was discovered that some investors were seeking to avoid consolidating loss making subsidiaries by arguing that the losses were not benefits to the investor! The term returns was adopted because returns can be both positive and negative (AASB 10.B56). Some examples of potential returns from the investee to the investor are provided in AASB 10.B57 and include, but are not limited to, dividends, the ability to obtain resources not available to other parties (e.g., produce distribution channels or access to scarce raw materials), tax benefits, or economies of scale.

Link between power and returns
The third component of the control definition is that the investor has to be able to use its power over the investee to impact the amount of return generated by the investee. That is, it is not enough for the investor to be exposed to variable returns from the investee, it must be able to also have the ability to interact with the investee in such a way that it affects how much return the investee makes. This component of the control definition is especially important in the context of our discussion of SPEs in section 1.5.5. It was noted in that section that a bank, for instance, may enter into a securitization arrangement by creating an entity such as a trust that is placed on auto-pilot. A key component of the auto-pilot arrangement is that the management and decision-making responsibilities for the trusts relevant activities is given by the bank to an independent entity, the trustee. The objective of the arrangement is to allow the bank to meet its securitization needs by transferring power over the trusts relevant activities to the third party trustee while at the same time avoiding bringing the trust onto the groups consolidated financial statements. These types of situations are described in AASB 10.18 as principal or agent arrangements; that is, it must be determined whether the trustee is the principal investor entity for the trust or whether the trustee is actually only acting as an agent on behalf of the bank (in other words, the bank is the principal and the trustee is the agent). If it is decided that the bank is a principal, then it has not transferred power over the SPE trust to the trustee and it will have to consolidate that SPE trust into the groups consolidated financial statements.
AASB 10.B58B75 provide implementation guidance on assessing whether a decision- maker is acting as a principal or as an agent for another investor. Again, it is important to assess each case on its own facts but AASB 10.B60 suggests that factors that should be considered include:
The scope of the decision-makers authority over the investee. If the decision- maker has considerable freedom to make decisions about the relevant activities of the investee, then it is more likely to be a principal;
What rights are held by other parties? For example, does another party have substantial and unilateral rights to remove the decision-maker (so-called kick- out rights) or must a number of parties be required to act together before the decision-maker can be removed?;
How is the remuneration of the decision-maker determined for its involvement in the investee? If, for instance, the decision-makers remuneration is largely independent of the returns generated from the investee, then the decision-maker is more likely to be an agent rather than a principal;
Does the decision-maker have financial interests other than remuneration in the investee that expose the decision-maker to the variability in returns that would be experienced by a principal? For example, what is the size, if any, of the decision-makers holding in the equity of the investee?
None of these factors in themselves is conclusive in determining whether a decision- maker is a principal or an agent for another investor and it may be that in practice it will be necessary to determine a decision-makers status on the balance of a variety of factors.
In summary, the definition of control in AASB 10 requires the facts of each investor investee relationship to be analysed to determine whether the three components of

control have been satisfied; namely, does the investor have power to direct the relevant activities of the investee by having the current ability to exercise substantive rights; is the investor exposed to variable returns from its involvement with the investee; and does the investor have the ability to use its power over the investee to potentially vary the amount of returns generated from the investee. If all three of these components are satisfied, then the investor controls the investee and the investor must prepare consolidated financial statements.

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